WFC - Wells Fargo

[cmlber]

Fuzzhead, (a) your math must be wrong, it's impossible to assume multiple expansion (from 1.2x to 1.7x) with a 10% FCF yield and somehow earn 6% real returns, and (b) why is 1.5x book the right multiple, seems pretty arbitrary?

 

Seems like he is ignoring buybacks and/or dividends?

 

Math:

 

Book Value at Year 1: 180B

Book Value at Year 10: 360B

 

Cost of Equity: 8.0% (GDP@3%+ inflation@3%+ equity kicker@2%)

 

Book value growth becomes null.

 

The excess is what can be used for buybacks or divy's or whatever the team decides is the right way to use the money. Multiple expansion and dividends are the only thing that are returned to the investor after the discount rate is applied.  Return on equity for WFC is prolly gonna run at 11% over the next decade.  Leaving 3% excess and then when you add the multiple expansion return of an extra of a bit over 3% gets you to just over 6%.  Move the cost of equity down if you'd like, but it can't be much lower than 5%??  Perhaps there is margin expansion and the ROE goes up but that is a different assumption.  If you don't consider the equity kicker as part of your discount, that still only gets you to 8% real returns.

 

None of this makes any sense...  if the FCF yield is 10% today and earnings don't go up or down, with no multiple expansion, you make 10%.  Period.  If the multiple expands, you make more than 10%.  Period.  It seems like you're disputing this with some odd formula that takes ROE - Cost of Equity + Multiple Expansion  :o

[Guest Schwab711]

I think fuzzhead is mixing up the appropriate P/B method with BV growth itself. At 0% growth, 10% yield (all NI is distributed), P/B should be ~1.25x.

 

It's an odd way to write it but Inflation + (GDP + kicker) is essentially smoothed 20Y/30Y UST + equity risk premium, which is a reasonable proxy for WFC's cost of equity.

 

 

I agree with cmlber that returns are simply a function of initial yield, earnings growth, and multiple expansion.

 

Buybacks at P/B > 1 dilute BV/share, which decreases possible multiple expansion but increases ROE. It doesn't accomplish anything without earnings growth. Without earnings growth, all NI is distributed. If you don't DRIP, then your CAGR < yield. If you DRIP, CAGR is roughly equal to yield.

 

WFC needs earnings growth or returns will be low.

 

 

My concern about the asset cap remaining is simply saying that I don't think WFC can materially increase their ROA over time (thus, no earnings growth). If it remains on for too long, I think WFC will lose some of their competitive advantage that allows them to earn higher ROA.

 

Obviously, ROA trending towards 1.5% and the removal of the asset cap would make WFC a homerun investment (as far as bank investments go).

[fuzzhead1506]

 

 

Scenario A: Assume they maintain current P/B and ROE is 11%. They retain all earnings. CAGR is 11%.

Scenario B: Same as A, but they payout 100% of earnings. Dividend yield of ~9.5%.

 

Reality will be somewhere in that range (based on the payout ratio). So I still don't see how your math works.

 

Based on your assumptions, the intrinsic return (assuming no increase in multiple) seems to be 9.5%-11%. 6.5%-8% real (using your assumptions though I would use 2% inflation).

 

--

If the cost of equity is really 8%, then you would also expect multiple expansion.

 

So the expected real return is at least 6.5% + Multiple expansion + ROE increase

 

--

Importantly, you are getting ~10% returns with relatively little valuation risk. If they can maintain 11% ROE, it is unlikely they will trade below book for long periods of time. If they do, the buybacks will add an additional kicker.

 

Whether 10% returns (plus potential upside) are attractive to you depends on how you view other opportunities.

 

Sorry for shooting from the hip with my original quip and then following up with bad math - I obviously created a kerfuffle.  I am gonna go ahead and eat crow because I was definitely wrong with my original statement of 4%. 

 

I apologize for that  :-[ 

 

you are right here: somewhere in the 6.5-9% real range is to be expected which is not what I said at the outset. 

 

One thing you said that didn't quite jive with my thoughts, though: are you saying that there should be a multiple expansion above the current to 1.5-1.7x given current ROE and assumed cost of equity? That would not make sense to me.  If the ROE goes up which is an optimistic assumption, but not impossible, then (like i said in my other post) multiple expansion is also likely and would be a kicker.  Cost of equity at 8% gets me to a implied book value not much higher than the current valuation depending on the payout ratio, maybe 1.3-1.4x.  If they opt for a 100% payout policy and our cost of equity is correct,  then 1.2ish should be the correct valuation. 

[james22]

https://finance.yahoo.com/news/warren-buffett-bullish-on-banks-jpmorgan-jamie-dimon-095717582.html

 

How many times have you heard that WEB will comment publicly on a specific group of stocks, not just the business but also making a prediction of the price?

(He frequently talk about businesses but rarely predict stock prices.)

 

Anyone prefer the sector index (VFAIX, for example) over WFC?

[Viking]

... The big question with WFC: is this a great company that temporarily lost its way and that will over the next couple of years return to greatness? Or is this a damaged company that will simply do ok moving forward (greatness is in the past). Right now my brain is telling me it is the latter but my heart is telling me the former is still possible.

 

Viking,

 

Leaving out the details of your last post by quoting here, & to me an awesome post, because this is to me the key question. To me, the question appears far from easy to answer from where we are now with WFC.

 

John, i am wondering if there are parallels between WFC today and BAC of 2015. Back then BAC was just turning the corner:

1.) true profitability was muted due to fines and bloated expenses

2.) investors were focussed on the mistakes the bank had made in the past and not recognizing the changes that Moynihan was implementing over many years

 

As an investor i think we are late in the cycle. While i expect the US big banks to perform better than expectations in terms of profitability in the next recession (BAC and perhaps JPM), when the dowturn comes all bank stocks will likely get killed (similar to Dec 2018). I think they will be great investment on the other side. So my approach right now is to be more of a trader and with an underweight position buy the dip and sell the rally (for a nice 4 to 6% gain... rinse and repeat).

[rolling]

My main question is: BAC, WFC and JPM all trade a little over 11x earnings. At the same multiple, is there a clear quality difference between them?

[KCLarkin]

My main question is: BAC, WFC and JPM all trade a little over 11x earnings. At the same multiple, is there a clear quality difference between them?

 

To complete the picture, you should also look at Return on Tangible Equity and Price to Tangible Equity. They are pretty similar now, but in the past BAC was cheaper on book value but more expensive on P/E.

 

Dividend yields, buyback yields, and growth differ slightly between the three so some investors might have different preferences. But I don't see any reason not to own all three.

[CorpRaider]

My main question is: BAC, WFC and JPM all trade a little over 11x earnings. At the same multiple, is there a clear quality difference between them?

 

Great/tough question, isn't it?  Historically WFC had better ROTE and ROAs, but you know it seems like the culture that achieved that had some drawbacks too.  :-/

 

I personally prefer the deposit base banks that WEB and CMT seem to have preferred (so BAC and WFC).  I like WFC's mix of businesses better (don't like a lot of the Merrill business, think it is a dinosaur), but WFC has no CEO and has an asset cap/restriction.  Even with all that WFC still doesn't look appreciably cheaper to me.  Also they are all three so darned big.   

[Spekulatius]

My main question is: BAC, WFC and JPM all trade a little over 11x earnings. At the same multiple, is there a clear quality difference between them?

 

Great/tough question, isn't it?  Historically WFC had better ROTE and ROAs, but you know it seems like the culture that achieved that had some drawbacks too.  :-/

 

I personally prefer the deposit base banks that WEB and CMT seem to have preferred (so BAC and WFC).  I like WFC's mix of businesses better (don't like a lot of the Merrill business, think it is a dinosaur), but WFC has no CEO and has an asset cap/restriction.  Even with all that WFC still doesn't look appreciably cheaper to me.  Also they are all three so darned big. 

 

WFC doesn’t have an investment banking business , which tends to be volatile, has considerable tail risk and usually fetched a lower multiple. I think JPM‘s investment banking is still 1/3 of the total earnings and I think BofA‘s  Share is similar.

[sleepydragon]

My main question is: BAC, WFC and JPM all trade a little over 11x earnings. At the same multiple, is there a clear quality difference between them?

 

One ratio to look at is Price/TBV.

I think JPM is current at Price/TBV = 2. But ROTE is at 17ish.

WFC is 1.6, with ROTE 13ish.

BAC is 1.55ish, with ROTE around 15.5%, i think.

 

Jamie Dimon just said in his letter that at 17ish ROTE they shall continue to buy back even if P/TBV is >= 2.

 

WFC shall be able to get to at least ROTE of 15 in a few years after they get out of the current mess.

 

BAC seems cheapest.

JPM is becoming the king on wall street (I heard all people in GS want to get a job there), but there's no bargain.

and WFC has the simplest business model (no investment banks. and WFC traditionally at higher P/TBV due to this)

 

Best to buy all 3 equal weighted.

 

I had all 3. Sold JPM and bought BRK.B instead. Kept and bought more BAC and WFC.

[rolling]

Thank you all for your answers. The easiest choice seems to be to just buy all 3, but now I understand better the differences. Best business model WFC, better management BAC and especially JPM, price differences more apparent on P/B than on P/E. More than this only by digging on the reports.

[JayGatsby]

I do my personal banking mainly through Schwab, and use Wells for business banking. Wells is one of a small handful of banks that plugs into Xero for accounting (Chase does as well...), but otherwise they're a dinosaur. Dealing with them is like being stuck inside of a pinball machine... every so often you find the right person and something happens, but mostly you just bounce around trying not to fall off the board.

[Spekulatius]

I do my personal banking mainly through Schwab, and use Wells for business banking. Wells is one of a small handful of banks that plugs into Xero for accounting (Chase does as well...), but otherwise they're a dinosaur. Dealing with them is like being stuck inside of a pinball machine... every so often you find the right person and something happens, but mostly you just bounce around trying not to fall off the board.

 

Wells hasn’t updated their online platform for  as many years ai remember (probably 2008). That said, it works, but I think they could do better than the average $3B balance sheet credit union with their online banking. I also use Wells Fargo advisers (still 100 free trades) and it works as well. There was one platform refresh since 2008. Again a working platform, but nothing compared to online brokers like Schwab etc. I do like their way of tax lot management and they get the taxes right (downloads into Tax software without issues).

[John Hjorth]

I do my personal banking mainly through Schwab, and use Wells for business banking. Wells is one of a small handful of banks that plugs into Xero for accounting (Chase does as well...), but otherwise they're a dinosaur. Dealing with them is like being stuck inside of a pinball machine... every so often you find the right person and something happens, but mostly you just bounce around trying not to fall off the board.

 

Wells hasn’t updated their online platform for  as many years ai remember (probably 2008). That said, it works, but I think they could do better than the average $3B balance sheet credit union with their online banking. I also use Wells Fargo advisers (still 100 free trades) and it works as well. There was one platform refresh since 2008. Again a working platform, but nothing compared to online brokers like Schwab etc. I do like their way of tax lot management and they get the taxes right (downloads into Tax software without issues).

 

Spekulatius,

 

I'm shocked by reading your post. Somehow it - to me, at least - exposes WFC as some kind of dinosaur, underinvesting in its business, over many years.  Thank you for sharing your customer experience.

[gfp]

Warren gave an interview to the FT -

https://www.ft.com/content/1ccb766e-565b-11e9-91f9-b6515a54c5b1

[CorpRaider]

Saw that.  Really reinforces the value of having him as the largest shareholder for both WFC and USB. 

[Spekulatius]

I do my personal banking mainly through Schwab, and use Wells for business banking. Wells is one of a small handful of banks that plugs into Xero for accounting (Chase does as well...), but otherwise they're a dinosaur. Dealing with them is like being stuck inside of a pinball machine... every so often you find the right person and something happens, but mostly you just bounce around trying not to fall off the board.

 

Wells hasn’t updated their online platform for  as many years ai remember (probably 2008). That said, it works, but I think they could do better than the average $3B balance sheet credit union with their online banking. I also use Wells Fargo advisers (still 100 free trades) and it works as well. There was one platform refresh since 2008. Again a working platform, but nothing compared to online brokers like Schwab etc. I do like their way of tax lot management and they get the taxes right (downloads into Tax software without issues).

 

Spekulatius,

 

I'm shocked by reading your post. Somehow it - to me, at least - exposes WFC as some kind of dinosaur, underinvesting in its business, over many years.  Thank you for sharing your customer experience.

 

WFC is not a leader in online/ digital banking, that’s for sure. I failed to mention that they have improved their mobile app during the last few years, and that’s quite important. I also felt their branches were better run than the big bank competition a while ago, but since Inrarely go to branches any more and WFC doesn’t even have branches where I live (greater Boston area), it doesn’t really matter.

 

One thing I noticed when opening a checking account with a local credit union a few days ago, is that they have clickswitch (apparently a fin tech company) that has a software that allows for easy accounting switching. It will switch direct deposits from many employers and reoccurring payments from an existing checking account to your new account. This could indirectly increase competition for checking accounts as it makes it easier to switch. I haven’t tried it out yet, so I don’t know how well it works.

[sleepydragon]

Warren gave an interview to the FT -

https://www.ft.com/content/1ccb766e-565b-11e9-91f9-b6515a54c5b1

 

“More of the interview will be published end of this month” — FT sure knows how to sell a newspaper..

[cmlber]

My main question is: BAC, WFC and JPM all trade a little over 11x earnings. At the same multiple, is there a clear quality difference between them?

 

Are you referring to 11x TTM earnings, where WFC is burdened by $2.5B of one-off charges and $1B of core deposit amortization (not a real expense)? Also, WFC has ~10% of its market cap in excess capital, vs ~2% for JPM.

[CorpRaider]

Good stuff.  Quick, which Minnesota bank:  USB or Norwest/WFC?

[Viking]

My main question is: BAC, WFC and JPM all trade a little over 11x earnings. At the same multiple, is there a clear quality difference between them?

 

Are you referring to 11x TTM earnings, where WFC is burdened by $2.5B of one-off charges and $1B of core deposit amortization (not a real expense)? Also, WFC has ~10% of its market cap in excess capital, vs ~2% for JPM.

 

cmlber, i am also thinking that reported profitability at WFC is understated given the reasons you posted. Should provide some nice tail winds over the next couple of years :-)

[undervalued]

My main question is: BAC, WFC and JPM all trade a little over 11x earnings. At the same multiple, is there a clear quality difference between them?

 

Are you referring to 11x TTM earnings, where WFC is burdened by $2.5B of one-off charges and $1B of core deposit amortization (not a real expense)? Also, WFC has ~10% of its market cap in excess capital, vs ~2% for JPM.

 

cmlber, i am also thinking that reported profitability at WFC is understated given the reasons you posted. Should provide some nice tail winds over the next couple of years :-)

 

Is there any reason why we stick to BAC, WFC and JPM? PNC looks cheap also right? P/B at 1.2. P/E at 11.9. Return on Asset is better than WFC at 1.3. Over 10 year period, it has beaten BAC, WFC, and JPM.

[rolling]

My main question is: BAC, WFC and JPM all trade a little over 11x earnings. At the same multiple, is there a clear quality difference between them?

 

Are you referring to 11x TTM earnings, where WFC is burdened by $2.5B of one-off charges and $1B of core deposit amortization (not a real expense)? Also, WFC has ~10% of its market cap in excess capital, vs ~2% for JPM.

I was still thinking on doing my homework on these, and decided to ask where to start (and got a great help over here).

 

 

Last numbers I get is 22.4 B net income,  255.7B market cap. Those adjustments would mean 25.9B adjusted net income and 9.87P/E. If we assume they use excess capital to buy 8% of shares outstanding, that would mean 9.1 P/E, with a cap on asset growth (so they would need to choose higher return assets, not that bad). This would be why I decided this might be worth looking at.

 

With that said, as with all other banks, earnings should be inflated by low taxes not yet competed away.

[Rasputin]

Hi rolling,

 

1.  The market cap is $222.5 Billion using $48.9 share price and 4.5494 Billion shares outstanding

 

2.  Look at the line called Net Income Applicable to Common Stock (instead of Net Income) because there was $1.7 B preferred stock dividend in 2018.  NIACS was $20.7 B in 2018

 

For me, I try to get to core operating earnings by reversing one time charges or gains.  Just like BAC prior to 2017, WFC's 2018 income statement is full of one time gains and charges.  This core operating earnings is subjective but below is how I did mine for 2018

all numbers are post tax, negative means I subtract that number from reported NIACS, positive means I add that number to reported NIACS

 

Reported NIACS $20.7 B

Provision minus Net Charge-Offs Negative $0.8 B

Gain on Security Sale Negative $1.32 B

Gain on Loan sale Negative $2.06 B

Amortization of Intangibles $0.87 B

Litigation Accrual $1.47 B

Tax Effects $0.19 B

LOCOM Puerto Rico Sale $0.14 B

Redemption of Preferred Charges $0.15 B

 

Core Operating Earnings $19.34 B or roughly $4 per share.  That's my personal core eps, everybody should have their own. 

 

 

What Wells Fargo is going through is not only adding a lot of operating expenses but also is very business disruptive.  So they're being hit both on the revenue side and the expense side.  One of the lesson I learned from my investments in BAC is that my estimate tended to be a little high during their tough periods and my estimates were way low during their normalized period. 

 

Wells' revenue has been buffetted by accretable yield from the Wachovia loans bought in 2018.  You can see how much of these were added to WFC's revenue on Note 6 Table 6.20 of the 2018 10K.  They were $1.1 B of interest income and $2.4 B of non interest income (part of gains on loan sale).  This balance is running off and will be gone in the next few years. 

 

 

 

[mwtorock]

https://investors.principal.com/investor-relations/news-and-events/financial-press-releases/press-release-details/2019/Principal-to-acquire-Wells-Fargo-Institutional-Retirement--Trust-business/default.aspx

 

Shredding some assets